Benefits of Forex Trading

Benefits of being a Professional Forex Trader

The lists of benefits and rewards of trading forex goes on and on. Here are a few of the biggest advantages of trading the forex market:

No commissions
No clearing fees, no exchange fees, no government fees, no brokerage fees. Most retail brokers are compensated for their services through something called the bid/ask spread and if your trade is held overnight; swops.

No middlemen
Spot currency trading eliminates the middlemen and allows you to trade directly with the market responsible for the pricing on a currency pair. Be wary of B-Book brokers acting as middlemen who trade against their clients.

No fixed lot size
In the futures markets, lots or contract size are set by the exchanges. A standard-size contract for silver futures is 5,000 ounces. In spot forex, you determine your own lot, or position size. This allows traders to participate with accounts as small as $25 (this tiny amount is not practical for trading). Although the standardized minimum position in spot forex is 0.01 lots which equals $0.10 per pip movement.

Low transaction costs
The retail transaction cost (the bid/ask spread) is typically less than 0.1% under normal market conditions. At larger dealers, the spread could be as low as 0.07%. Of course this depends on your leverage.

A 24-hour market
The retail forex market is a 24 hour a day, 5 days a week market. The market opens on Monday morning in time with the Australian stock market and only closes on Friday afternoon with the close of the New York market. This is one of the biggest benefits as trading does not close at the end of every weekday. For those who want to trade on a part-time basis, you can choose when you want to trade: morning, noon, night, at any point in your day, or while you sleep.

No one can corner the market
The foreign exchange market is so big and has so many participants that no single entity (not even a central bank) can control the market price for an extended period of time.

Leverage
In forex trading, a small deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum. For example, a forex broker may offer 100-to-1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $5,000 worth of currencies. Similarly, with $500 dollars, one could trade with $50,000 dollars and so on. While this is advantage, let’s remember that leverage works both ways. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.

High Liquidity
Because the forex market is so big, it is also very liquid. This is an advantage because it means that under normal market conditions, with a click of a mouse you can instantly buy and sell at will as there will usually be someone in the market willing to take the other side of your trade. You are never be stuck in a trade. You can even set your online trading platform to automatically close your position once your desired profit level (a limit order) has been reached, and/or close a trade if a trade is going against you (a stop loss order).

Low Barriers to Entry
You would think that getting started as a currency trader would cost a lot of money. The fact is, when compared to trading stocks, options or futures, it doesn’t. Online forex brokers offer “mini” and “micro” trading accounts, some with a minimum account deposit of $100. We’re not saying you should open an account with the bare minimum, but it does make forex trading much more accessible to the average individual who doesn’t have a lot of start-up trading capital.

Forex Market vs Stock Market

There are around 2,800 stocks listed on the New York Stock exchange. Another 3,100 are listed on the NASDAQ. Which one will you trade? Do you have the time to stay up-to-date of so many companies? In spot currency trading, there are dozens of currencies traded, but many market players trade the four major pairs. Aren’t four pairs much easier to keep informed on than thousands of stocks? That’s just one of the many advantages of the forex market over the stock markets. Here are a few more:

24-Hour Market
The forex market is a seamless 24-hour market. Most brokers are open from Sunday at 3:00 am CAT until Friday at 12:00 pm CAT, with customer service usually available 24/7. With the capability of trading during the U.S., Asian, and European market hours, you can customize your own trading schedule.

Minimal or No Commissions
Most forex brokers charge no commission or additional transactions fees to trade currencies online or over the phone. Combined with the tight, consistent, and fully transparent spread, forex trading costs are lower than those of any other market. Most brokers are compensated for their services through the bid/ask spread.

Instant Execution of Market Orders
Under normal market conditions, your trades are instantly executed. The price shown when you execute your market order is the price you get. You’re able to execute directly off real-time streaming prices, online from your trading platform. Keep in mind that many brokers only guarantee stop, limit, and entry orders under normal market conditions. Trading during a massive fundamental news announcement of global disaster would not fall under “normal market” conditions. Orders are filled instantaneous most of the time, but under extraordinarily volatile market conditions, order execution may experience delays.

Short-Selling without an Uptick
Unlike the equity market, there is no restriction on short selling in the currency market. Trading opportunities exist in the currency market regardless of whether a trader is long or short, or whichever way the market is moving. Since currency trading always involves buying one currency and selling another, there is no structural predisposition to the market. So you always have equal access to trade in a rising or falling market.

No Middlemen
Centralized exchanges provide many advantages to the trader. However, one of the problems with any centralized exchange is the involvement of middlemen. Any party located in between the trader and the buyer or seller of the security or instrument traded will cost them money. The cost can be either in time or in fees. Spot currency trading, on the other hand, is decentralized, which means quotes can vary from different currency dealers. Competition between them is so fierce that you are almost always assured that you get the best deals. Forex traders get quicker access and cheaper costs.

Buy/Sell programs do not control the market
How many times have you heard that “Fund A” was selling “X” or buying “Z”? The stock market is very susceptible to large fund buying and selling. In spot trading, the massive size of the forex market makes the likelihood of any one fund or bank controlling a particular currency very small. Banks, hedge funds, governments, retail currency conversion houses, and large net worth individuals are just some of the participants in the spot currency markets where the liquidity is unparalleled.

Analysts and brokerage firms are less likely to influence the market
Have you watched TV lately? Heard about a certain Internet stock and an analyst of a prestigious brokerage firm accused of keeping its recommendations, such as “buy,” when the stock was rapidly declining? It is the nature of these relationships. No matter what the government does to step in and discourage this type of activity, we have not heard the last of it. IPOs (companies being publicly listed) are big business for both the companies going public and the brokerage houses. Relationships are mutually beneficial and analysts work for the brokerage houses that need the companies as clients. That catch-22 will never disappear. Foreign exchange, as the prime market, generates billions in revenue for the world’s banks and is a necessity of the global markets. Analysts in foreign exchange have very little effect on exchange rates; they just analyze the forex market.

Forex vs. Futures
The forex market is also acknowledged as having many advantages over the futures market, like its advantages over stocks.

Liquidity
In the forex market, $5.3 trillion is traded daily, making it the largest and most liquid market in the world. This market can absorb trading volume and transaction sizes that dwarf the capacity of any other market. The futures market trades a smaller daily volume of $30 billion per day. The futures markets can’t compare with its relatively limited liquidity. The forex market is always liquid, meaning positions can be liquidated and stop orders executed with little or no slippage, with exception to extremely volatile market conditions.

24-Hour Market
At 12:00 am CAT Monday, trading begins as markets open in Sydney. At 2:00 am CAT the Tokyo market opens, followed by London at 10:00 am CAT. And finally, New York opens at 3:00 pm CAT and closes at 11:00 p.m. CAT. After New York trading closes, the Sydney market opens back up again – it’s a 24-hour market. As a professional trader, this allows you to react to favorable or unfavorable news by trading immediately. If important data comes in from the United Kingdom or Japan while the U.S. futures market is closed, the next day’s opening could be a wild ride. Overnight markets in futures contracts do exist, and while liquidity is improving, they are still lightly traded relative to the spot forex market.

Minimal or no commissions
With Electronic Communications Brokers becoming more popular and prevalent over the past couple of years, there is the chance that a broker may require you to pay commissions. But really, the commission fees are small compared to what you pay in the futures market. The competition among spot forex brokers is so aggressive that you will most likely get the best quotes and very low transaction costs.

Price Certainty
When trading forex, you get rapid execution and price certainty under normal market conditions. In contrast, the futures and equities markets do not offer price certainty or instant trade execution. Even with the arrival of electronic trading and limited guarantees of execution speed, the prices for fills for futures and equities on market orders are far from certain. The prices quoted by brokers often represent the previous trade, not necessarily the price for which the contract will be filled.

Guaranteed Limited Risk
Traders must have position limits for the purpose of risk management. This number is set relative to the money in a trader’s account. Risk is minimized in the spot forex market because the online capabilities of the trading platform will automatically generate a margin call if the required margin amount exceeds the available trading capital in your account. During normal market conditions, all open positions will be closed immediately (during fast market conditions, your position could be closed beyond your stop loss level). In the futures market, your position may be liquidated at a loss bigger than what you had in your account, and you will be liable for any resulting deficit in the account.

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